Reinsurers fear being single after the M&A party

The big talking points on the cocktail terraces of Monte Carlo this year will revolve around rumours as to which brokers might move firms and which companies may next merge or acquire each other, according to Tad Montross, chairman and chief executive of General Re Corporation.

“Rumours about which brokers are next to jump ship will be a big talking point—they are switching firms faster than the captain of the Costa Concordia abandoned ship,” he said.

“Everyone has been talking about all the M&A activity. It’s been frenetic out there. Everyone is looking for a partner and everyone is scared they’ll be left single at the party.” This flurry of both corporate consolidation and individuals seeking better deals, has been driven by the numerous challenges facing the market.

Montross lists these as being the influx of capital and reinsurance alternatives such as cat bonds and hedge funds; a benign cat period with insured cats in both 2013 and 2014 over a third below the 10-year average; and seven years of record-breaking low interest rates.

Specifically, on the point about benign cat losses, he points out that it has been nine years since a hurricane has made landfall in Florida—the longest stretch since 1851.

He also highlights another challenge that is emerging for the industry: that of uncertain loss trends. “We’ve had negative frequency and modest severity in many classes of business, much like the mid-1990s. There are a number of indications that we are seeing a reversion to the mean.

“All this has driven frenetic M&A activity,” he said. “With organic top line growth near impossible, there is the hope that one plus one will equal more than two and the expectation of significant expense savings.”

General Re’s own strategy has been defined by this. Montross said that for the past 24 months, the company has not sought top line growth. “In this market it is very difficult to grow,” he said. “Financial markets have become increasingly short term-oriented. The average holding period of a stock on the New York Stock Exchange is less than 11 months.

“Investors in reinsurance start-ups often want exit criteria that allow them to get out in as little as 18 months. Reinsurance is a long-term business. Losses and recoverables will be  outstanding for years. In some cases, decades. Gen Re is going to be there for our clients.”

As such, he said, it is General’s Re strategy to approach every deal on its own merit.

“We don’t speculate about the market. We approach every client and transaction on its ow merits. The biggest pricing challenge the primary industry faces is good loss experience in the face of increasing exposures. The world is warmer and wetter and sea levels are rising,” he said.

“We are constantly working with clients and prospects to demonstrate the benefit of a direct reinsurance partnership.”